Trade, Growth and Development
Topic: The impact of change in world oil prices
Introduction
The world is rapidly changing and these changes have a drastic impact on the demand and supply
of commodities. According to a report in Forbes, the biggest driver of oil prices in the present
scenario is the supply cuts by Russia and the Organisation of Petroleum Exporting Countries
(OPEC) (Forbes, 2023). Besides, the change that impacts the prices of world oil prices can be
categorised into political changes and technological changes. The average price of crude oil has
been noted to be 80.12 US dollars which is noted to be 22 US dollars low when the energy
supply was disrupted due to Ukraine Russian war.
Figure 1: Change in prices of Oil
(Source: Statista, 2024)
This can be used to understand that the prices of oil are highly sensitive in global political
development and change and hence in this blog the impact of change on the prices of oil will be
explored and analysed.
How has political development affected the prices of oil?
Political developments are understood as changes in the political dynamics in a particular region.
According to Weforum (2016), energy has been considered highly political. The geopolitical
battle concerning oil has changed from access to resources to pushing out high-cost oil producers
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in the US. While it has been understood that Saudi Arabia has been flooding the Oil market to
ensure that its regional rival Iran finds it tough to establish itself in the oil market. Another
report, states that Saudi Arabia decided to prolong its million-barrel-a-day supply curb till the
end of this year (Bloomberg, 2023). This move by Saudi Arabia is expected to increase the prices
of gasoline. In the same context, Russia also extended its curb to exports of 300000 barrels a day
for the same period of time. These decisions resulted in raising the prices of oil above 90 US
dollars per barrel. On the other hand, the new policy of Saudi Arabia has been noted to suppress
the oil prices to an 11-year low which is noted to be under 34 US dollars (Tabesh, 2016). This
change in policy has resulted in an increase in market share while allowing countries to purchase
oil at low prices.
In a study, by Zhang et al. (2024), due to the political conflict between Ukraine and Russia, the
energy market was the hardest hit sector. It is understood that the supply of energy is highly
dependent on the distribution channels which can be disrupted due to political events like wars
which was the case between Ukraine and Russia. The study depicted that the sanction imposed
on Russia by the US has resulted in a significant rise in crude oil prices. In March 2022, the price
of crude oil was noted to have touched 133.460 US dollars which was the highest since the year
2008.
Figure 2: Events related to the Ukraine-Russia war that impact the prices of oil
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(Source: Zhang et al. 2024)
It has been understood that due to the Ukraine-Russia war, the WTI crude prices experienced a
70.72% change in prices while the Brent crude oil prices were noted to have changed by 73.62%.
It is not a brainer that these wars also impact the ability of the producers of oil to transport
supplies easily as the supply chains are hugely affected. In Europe, Brent crude oil prices were
noted to have increased by 41.40 US dollars. The war between Ukraine and Russia resulted in an
increase in the difference between prices of Brent crude oil and WTI crude oil. Besides, it is to
be noted that Russia is one of the major exporters of oil in the world and it is involved in the war
that resulted in an increase in the need for more finance which it can garner by increasing its
export charges. On the other hand, In the UK Brexit, was noted to influence the prices of crude
oils on a short-term basis (Fuelcards, 2022). Besides, political events like elections in the US and
their results are likely to impact the prices of oil in the global market. For example, if Donald
Trump gets elected in the 2024 elections, he is likely to remove sanctions imposed on Russia by
the US (Forbes, 2024). This would facilitate the oil market in the US with an increase in export
options and ultimately increase the exports. This can be used to determine that change in the
political landscape results in trade dynamics which can directly or indirectly impact the prices of
oil. Political events like elections, wars and internal rivalry from neighbours like those depicted
between Saudi Arabia and Iran are also vital in influencing the prices of oil in the global market.
What is the impact of technological change on the prices of oil?
The current global environment has seen an increase in technological innovations. Technological
innovation has allowed in unearthing of ideas that have reduced dependency on commodities like
oils. Technological advancement has also ensured that the costs related to refining and
processing oil have been reduced and carried out at a greater pace. High oil prices in the market
forced breakthroughs in technology in the extractive sector that have helped the emergence of
unconventional sources of oil (Arezki and Matsumoto, 2017). As a result, Shale oil has been
introduced into the market which has become a major part of the global oil supply. This has
provided the oil extractors with a new source to extract oil reducing dependency while in the
process increasing their supply which can fulfil the global demand. It is obvious that when
supplies are in abundance, the prices fall when considering the law of supply. Countries like the
US that are highly involved in the oil dynamics are likely to enhance their production of oil from
shale regions (Reuters, 2024). Production is expected to increase by almost 20000 barrels per
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day. This can also be understood as an alternative which reduces the monopolistic characteristics
of crude oil in terms of production and source.
Shale production in the US has increased considerably from 0.4 million per day in the year 2007
to 4 million barrels in the year 2017 (Weforum, 2015). The increase in Shale production by the
US was driven by the rise in crude oil prices which has been possible due to technological
innovations related to the drilling of shale oil. One of the reasons, there is a sharp decline in the
global prices of oil since 2014 can be attributed to enhanced production of Shale oil. The
worldwide shale production was approximately 12.67 million metric tons. This has assisted in
the demand for crude oil which resulted in a drop in global prices of the oil which can be directly
facilitated due to the enhancement of technology in the extraction sector.
Figure 3: Global Production of Shale Oil
(Source: Statista, 2023)
Technological developments like automation and robotics have also played a significant role in
the operations and processes related to the extraction of oil and gas. The use of robots and
automation has allowed companies in the extraction sector due reduce human intervention which
ultimately results in a high level of accuracy and a reduction of costs (LinkedIn, 2023).
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Figure 4: Automation in the Oil and Gas industry
(Source: LinkedIn, 2023)
The use of automation in the drilling process can reduce the cost of drilling by 40-45 per cent
(Crow et al. 2018). This further impacts the overall cost regarding the extraction of oil which is
ultimately reflected in its overall price., From another perspective, it can be said that automated
technology does not require rest like humans which can allow companies to extract more oil
from the oil bases. This can increase their supply and hence are forced to sell their oil at lower
rates to ensure that abundant storage space is available so that further extracted oil supplies can
be stored. This overall impact of technological changes which resulted in the enhancement of
drilling and extraction technologies can be attributed to the changes brought into the prices of oil.
How do changes in supply and demand influence the prices of oil?
Supply and demand play a huge role in the prices of oil on a global level. According to IMF
(2016), the decrease in the global price of oil can result from an increase in global supply or a
decrease in global demand. The reports of OPEC have suggested that there is an abundance
supply of oil while adding contributions from Iran and shale production for the US. On the other
hand, economic studies have depicted that the decline in prices has been driven by slow demand.
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Figure 5: Global Oil Production
(Source: IMF, 2016)
In a report by the International Energy Agency, it was found that the world's demand for oil is set
to halt in the coming years (IEA, 2023). This has been further attributed to the adaptation of
cleaner mediums of energy driven by the policies of the government. The use of oil for transport
is also expected to decline after 2026 due to the emergence of electrical vehicles. A global
energy crisis was also noted to be facilitated by the Ukraine-Russia war and the coronavirus
pandemic simultaneously. Besides, it has been unsurprisingly noticed that there has been an
increase in focus towards environmental issues. Companies have increasingly adopted more
sustainable methods of operations and transportation while countries around the world have
developed regulations and policies related to emissions. This has also acted as a major factor in
the demand for oil which has been reflected in the prices of oil. According to Bogmans et al.
(2023), climate policies have resulted in a global decline of 6.5 per cent in investment related to
traded oil and gas companies. This can be used to understand that due to an increase in the more
sustainable medium of transportation and operations by the businesses, a drop in demand for oil
has been noted which resulted in a drop in global prices.
Besides an increase in awareness regarding climate change and environmental causes has also
been attributed to a major aspect which has resulted in a drop in the demand for oil. It is
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understood that various metrics and goals related to environmental sustainability have been
formed which are also monitored by global bodies like the United Nations (UN). Countries have
developed zero emissions goals, while businesses have adopted these goals. Besides, the
Sustainable Development Goals (SDG) have also been a vital cog in the aspect of reducing the
usage of oil for transportation and in the supply chain processes.
Figure 6: Affordable and clean energy of SDG developed by the UN
(Source: UNEP, 2023)
SDG 7.2 targets the use of renewable sources of energy which enhances the facilitation so that
cleaner forms of energy can be accessed. This has resulted in efforts by governments and
businesses to be more sustainable and avoid the use of oils in transport as much as possible. As a
result, a drop in the demand for oil has been noticed which results in a change in the prices of oil
on the global level. In this regard, it can be understood that various aspects like environmental
policies have influenced the supply and demand of oil which reflect a change in the global prices
of oil.
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Conclusion
The blog has discussed the impact of various changes on the prices of oil in the world. The blog
has explored technological changes, political changes and the changes in supply and demand
facilitated by environmental policies. From the research conducted, political events like the
Ukraine-Russia war resulted in a disruption in the supply chain while also affecting political
dynamics which affected the prices of oil on a global level. On the other hand, the rivalry of
Saudi Arabia with Iran also made Saudi Arabia adhere to low-price offerings in the oil market.
Besides, technological advancements have resulted in lower costs related to the extraction of oil
which ensures that companies can provide oil in the market at a much cheaper rate.
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Reference List
Arezki, R. and Matsumoto, A., 2017. Technology and Unconventional Sources in the Global Oil
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